Santander Profit Slumps on Jump in Loan-Loss Provisions

Santander is among lenders under orders to speed up recognition of loan losses as the government makes cleaning up bank balance sheets a centerpiece of efforts to restore confidence in Spain’s creditworthiness. Photographer: Angel Navarrete/Bloomberg

Net income fell to 100 million euros ($122 million) from
1.39 billion euros a year ago, the Santander, Spain-based lender
said today. While earnings missed analysts’ estimates, the
shares rose 11 percent in Madrid trading, the most in two years,
as a pledge by European Central Bank President Mario Draghi to
defend the euro sparked a surge in banking stocks.

Santander is among lenders under orders to speed up
recognition of loan losses as the government makes cleaning up
bank balance sheets a centerpiece of efforts to restore
confidence in Spain’s creditworthiness. The bank set aside 2.78
billion euros to clean up souring property assets in the
quarter. A jump in doubtful loans in Brazil after the puncturing
of a record credit boom is also hurting profit at a unit that
contributes the biggest share of Santander’s earnings.

“The real estate cleanup in Spain is positive because it’s
something they have to do and the sooner they get it done the
better,” said Juan Pablo Lopez, an analyst at Espirito Santo
Investment Bank in Madrid, in a phone interview. “Impairments
in Brazil and lower revenue in the U.K. are a concern, as is the
overall deteriorating asset quality.”

Bonds Rebound

Santander reported earnings after doubts about the health
of lenders and public finances drove up Spain’s borrowing costs
and punished the shares of the country’s banks. Spanish bonds
rallied today along with banking shares after Draghi’s comments
in London.

Santander’s stock rebound, the biggest advance since May
10, trimmed this year’s decline to 17 percent, valuing the
lender at 43.9 billion euros. Draghi’s comments were “very
positive” and there’s no chance the euro will break up, Chief
Executive Officer Alfredo Saenz said at a news conference at the
bank’s headquarters outside Madrid today.

Santander will probably follow a “line of moderation” on
pay for board members and executives as some companies have
done, Saenz said on a webcast for analysts today. Telefonica SA
yesterday said top managers would make a 30 percent cut to total
compensation after the phone company’s board halt dividends.

Spanish Bonds

Bad loans as a proportion of total lending at Santander’s
group level rose to 4.11 percent from 3.98 percent in March and
3.78 percent a year ago, the bank said.

The bank booked 5.45 billion euros of loans newly classed
as in default, compared with 3.64 billion euros in the first
quarter. After taking the additional charges in the second
quarter, the bank has now covered 70 percent of the real estate
provisioning it’s required to make under the terms of the
government’s real estate clean-up order, Santander said.

Provisioning for bad loans hit earnings at Santander’s
Spanish units. Santander’s Spanish consumer branch network
posted a 23 percent drop in second-quarter profit to 173 million
euros as its bad-loan ratio jumped to 9.16 percent from 8.9
percent in the first quarter, the lender said.

Profit from Banco Espanol de Credito SA, a Spanish retail
bank owned by Santander, fell 39 percent to 41 million euros.
The bad-loans ratio across the Spanish business rose to 5.98
percent from 5.75 percent in March. The measure for Spanish bad
loans will probably rise to 6.7 percent by year-end, said Saenz.

Spanish Lending

Lending at the Spanish branch network fell 4.8 percent from
a year ago and rose 1.7 percent from the first quarter,
Santander said. Deposits climbed 5.4 percent from the first
quarter at the unit, even as they fell 7.2 percent from March at
Banesto.

Earnings from Brazil dropped 22 percent to 504 million
euros in the second quarter as loan provisioning jumped 38
percent to 1.74 billion euros.

The bad-loan ratio in Brazil reached 6.51 percent, up from
5.76 percent in March. Santander expects bad loans to stabilize
in Brazil in the second half of the year, Saenz said,

The bank earned 260 million euros in the second quarter
from its U.K. business, run by Ana Patricia Botin, the daughter
of Santander Chairman Emilio Botin. The unit posted a 124
million-euro quarterly loss in the year-earlier period as it set
aside 620 million euros to cover future U.K. loan-protection
claims.

Second-quarter net interest income in the U.K. fell 18
percent from a year earlier to 877 million euros. Net interest
income in the U.K. will probably keep falling in the third
quarter before stabilize in the final three months of the year.